Iran rulers eye currency mess from protected perch

DUBAI, United Arab Emirates — Just as Iran's currency was rattling near bottom after a stunning free fall, officials in Tehran opened a trade exhibition that included advanced engineering tools, heavy machinery and robotics. Nearly every Iranian booth had some connection to the country's powerful Revolutionary Guard and the ruling system it safeguards.

This display of the regime's industrial muscle showcases why the collapse of Iran's rial is unlikely to pose any immediate threats to the country's real centers of power, despite protests last week that brought quick speculation in the West about the stirrings of a popular revolt.

The top end of Iran's economy remains fully in the hands of the Revolutionary Guard and its networks, which span from oil to aerospace. And the lifeblood for the ruling clerics and the Guard still comes from Iran's oil exports that — on paper at least — bring in tens of millions of dollars a day to buffer against the blows hitting the rest of the country: a tanking currency, skyrocketing prices for imported goods and double-digit inflation.

"There is a lot of breathless talk about the regime collapsing," said Salman Shaikh, director of The Brookings Doha Center in Qatar. "It is no doubt under severe pressures and cannot ignore the currency situation, but the fundamentals of the economy, from the standpoint of the ruling system, are still OK."

The sanctions target oil exports, banking, and other sectors. They are imposed over Iran's nuclear program. The U.S. and allies fear that the country's uranium enrichment labs could eventually produce warhead-grade material. Iran insists its nuclear efforts are only for energy and medical uses. But some in Washington and European capitals openly say that, the nuclear issue aside, they would be delighted if sanctions brought the downfall of Iran's clerical leadership.

To be sure, it would take far more than the small-scale demonstrations in Tehran last week to pose any immediate threat to Iran's ruling establishment, which has the huge strength of the Revolutionary Guard behind it.

But neither can Iranian leaders afford to ignore the latest upheavals. The battle for perceptions and longer term stability goes by different rules.

They must now explain to a reeling public how they intend to stabilize an economy slammed by Western sanctions that have cut into oil exports and a deflated currency that lost nearly 40 percent of its value in a weeklong plummet — and why taking to the streets in protests is not the answer.

Iran's leaders are desperate to quell any sense of uncertainty and panic — which largely drove the downward pressures on the currency. Even small flare-ups could start to erode their claims that sanctions and economic isolation cannot unravel the country.

"Iran knows it needs to keep a tight lid on open opposition," said Mehrzad Boroujerdi, a Syracuse University professor who follows Iranian affairs. "As everyone knows well, these things can snowball out of control."

One thing that cannot be contained is Iran's internal political skirmishing.

Conservatives are using the crisis to hammer President Mahmoud Ahmadinejad, who once enjoyed the favor of the real powers in the country — top clerics and the Revolutionary Guard — but whose star has been in decline since he tried last year to challenge the authority of Supreme Leader Ayatollah Ali Khamenei. Ahmadinejad must leave office next year and the battle is on to determine who will be his successor in June 2013 elections.

Ahmadinejad's political foes have openly scapegoated him as the cause for the rial's drop, which hit an all-time low of 35,500 to the dollar on Wednesday and touched off merchant strikes at Tehran's bazaar and sporadic clashes as police tried to round up sidewalk money changers. The rate was about 10,000 as recently as early last year.

On Sunday, the dollar was fetching about 30,000 rials among unofficial street traders, who effectively set the daily rate used in nearly all commerce.

The rush to accuse Ahmadinejad also appears part of efforts to insulate the ruling clerics — and their foreign policy — from blame. One of Ahmadinejad's main political foes, Parliament Speaker Ali Larijani, parsed the currency crisis this way last week: 80 percent traced to Ahmadinejad's policies and 20 percent tied to sanctions.

"The attacks are growing due to the economic problems," said Ali Reza Khamesian, a journalist at Tehran's independent Maghreb daily.

Some officials are making increasing appeals for the country to pull together as the Western pressures mount.

During Friday prayers at Tehran University, Ayatollah Ahmad Khatami reached back to an earlier time where the country pulled together against an outside threat by calling the sanctions an "imposed economic war" — the same terminology Iran uses for its "imposed" 1980-88 war with Iraq.

But there is a risk of going too far in pointing the finger at the external foe.

Public support for Iran's nuclear program remains solid, but backers of the theocracy worry that closely linking the currency implosion to the sanctions could raise uncomfortable questions about Iran's defiance over uranium enrichment. Hence the attacks on Ahmadinejad.

"Frustration over high inflation and the state of the economy will persist, and sporadic protests such as Wednesday's are likely to become a new element in the Iranian political landscape," wrote Cliff Kupchan, Middle East director for the think tank Eurasia Group. "However, there is no evidence at this point that the temperature is reaching (the) boiling point."

One reason is the memory of how Iranian authorities brutally snuffed out the uprising after the disputed 2009 re-election of Ahmadinejad, before he lost favor. Officials unleashed civilian militias under the wings of the Revolutionary Guard to break up demonstrations.

While there are no signs of renewed street protests since last week's flare up, officials rushed ahead with efforts to calm domestic markets, get a grip on currency speculators and, hopefully, pump back some value in the rial. Parliament tabled other issues to focus on the economy.

In theory, Iran's leadership could attempt a rial rebound by opening up the treasury taps to flood the market with dollars. But plans last month to try to control exchange rates began "fueling doubts over the size of the government's accessible reserves and generating flight to other currencies," wrote Eurasia analyst Kupchan.

"The only thing that is likely to budge the regime is if they see or sense an existential threat," British Defense Minister Philip Hammond was quoted by The Observer newspaper on Sunday.

The European Union next week is expected to consider proposals for tougher sanctions, including a possible ban on Iranian natural gas. In July, the 27-nation EU placed on embargo on Iranian oil imports. U.S. Defense Secretary Leon Panetta also warned that Washington could increase its economic squeeze on Iran, citing the currency fall as evidence of its impact.

"Make no mistake, the international community will continue to impose additional sanctions," Panetta said Saturday during a stop in Peru.

Iran's foreign minister Ali Akbar Salehi fired back that the currency swings and inflation are not enough to upend the country — unlike Europe, which he suggested was torn apart over austerity plans.

"Iranian society is used to living with difficulties — perhaps better than those in Spain and Greece," he was quoted by the German weekly Der Spiegel in Sunday's edition. "We can count on our people's patience. Can you in Europe, too?"